Recovery On Track to Strengthen at End of 2009

The economy started the year in free-fall but is on track to end 2009 on stronger footing.

After a record four straight quarters of declines, the economy returned to growth in the July-to-September period. The government is expected to estimate the economy expanded at a 2.8 percent pace in the third quarter when it releases its final projection of last quarter's growth on Tuesday at 8:30 a.m. EST.

And many analysts think the economy appears headed for an even better finish in the current quarter.

The economy is probably growing at nearly 4 percent in the October-to-December quarter, analysts say. If they're right, that would mark the strongest showing since 5.4 percent growth in the first quarter of 2006 — well before the recession began. The government will release its first estimate of fourth-quarter economic activity on Jan. 29.

"The economy started 2009 with a whimper, but it is going to end it with a bang," economists Paul Ashworth and Paul Dales of Capital Economics predict.

Yet even such growth wouldn't be enough to quickly drive down the unemployment rate, now at 10 percent. High unemployment and tight credit for both consumers and businesses are expected to continue to weigh on the economic recovery. Many economists predict the economy's growth will slow to a pace of around 2 or 3 percent in the first three months of 2010.

Growth in the final quarter is expected to be driven by companies restocking depleted inventories. Stocks of goods were slashed at a record pace during the recession. So even the smallest pickup in customer demand will force factories to step up production and boost overall economic activity in the final quarter.

Stronger sales of exports to foreign customers, as well as spending by U.S. consumers and businesses, also will help underpin fourth-quarter growth.

It's been a wild ride for the economy this year. In the first three months, it shrank at a pace of 6.4 percent — its worst downhill slide in 27 years.

The recession eased in the second quarter, with the economy dipping at a pace of just 0.7 percent. A return to growth in the third quarter signaled the end of the worst and longest recession since the 1930s.

But much of the third quarter's growth was supported by government stimulus spending. The Cash for Clunkers rebates and an $8,000 tax credit for first-time homebuyers buoyed sales of cars and homes. The clunkers program ended in August, though the tax credit has been extended and expanded beyond first-time buyers.

It's unclear how the recovery will fare once the government withdraws stimulus programs put in place to combat the financial crisis and the recession. If consumers pull back on spending, the economy could tip back into recession.

Ashworth and Dales predict the recovery will slow, with the economy's growth fading to just 1.5 percent in 2011.

Against that backdrop, the Federal Reserve pledged last week to keep interest rates at a record low to help the recovery gain traction.

Faced with the prospects of high unemployment well into the 2012 presidential election year, President Barack Obama wants the government to take further steps to put Americans back to work. The House last week passed some provisions that Obama has pushed to aid job growth. But it didn't include new tax breaks for small businesses that hire.

The administration credits its $787 billion package of tax cuts and increased government spending with improving employment, though Republicans argue it did not help much.

The economy started the year in free-fall but is on track to end 2009 on stronger footing.After a record four straight quarters of declines, the economy returned to growth in the July-to-September period. The government is expected to estimate the economy expanded at a 2.8...